Cedar Fair maintains distribution, will "reconsider" its future

Posted | Contributed by Jeff

Cedar Fair Entertainment Company (NYSE: FUN), a leader in regional amusement parks, water parks and active entertainment, today announced the declaration of a regular quarterly cash distribution of $0.48 per limited-partner unit, representing an annualized distribution rate of $1.92 per unit. The distribution will be paid on February 17, 2009 to holders of record February 4, 2009.

“As we enter 2009 it is apparent we will face many of the same market challenges we faced during 2008,” said Dick Kinzel, Cedar Fair’s chairman, president and chief executive officer. “In light of the weak economy and uncertain credit environment, we are considering alternatives to reduce the Company’s debt levels and better position the Company for future growth. One such alternative includes reconsidering the Company’s distribution policy based on its overall long-term capital structure objectives. We will complete this evaluation in the near future and will not make any decisions on the level of future distributions until that review is completed and reviewed by the board.”

Read the press release from Cedar Fair.

Jeff's avatar

I'm scared to even look at what this will do to my units this morning. If they drop the distribution entirely, they had better have a game plan as to when they'll reinstate it. I could just smell the unit holder lawsuit otherwise.

Jeff - Editor - CoasterBuzz.com - My Blog

I may be wrong, but I thought that to qualify as a limited partnership, they're required to return so much to their partners in the form of distributions. If they pay less than a certain percentage of revenue or income, they'd no longer be a partnership and then they'd have all sorts of taxes and other crap to have to pay anyway.

The distribution is the only reason many people own units in CF. If it were severely reduced or eliminated, there'd be a major sell off.

Jeff's avatar

Such a requirement wouldn't make sense to me, because if the company were not profitable it wouldn't make sense to pay anything out.

But yeah, the distribution is certainly the primary reason to own units. The early free fall in unit price has stopped and it's headed back up a bit, but I'm still concerned. If I'm doing the math right, not paying the distribution for one year would score about $100 million, which maybe I'd be OK with provided it went 100% toward debt payments. The most interesting question though, is how would it affect their credit rating?

Jeff - Editor - CoasterBuzz.com - My Blog

If the LP would keep all that money instead of distributing it, would that affect its tax burden at all? Would that entire 100 million or whatever amount be available to be used for debt reduction, or would a portion of that end up being taxed? I know by definition the LP passes its tax burden to its partners, whether it's profit or loss, and the individual partners have to show it in our returns.

That's another issue-- if there is profit, and the partners have to include that in their tax returns, but don't receive a distribution to offset it, that makes the whole idea of investing in the LP undesirable.

Jeff's avatar

I'm not sure how they arrive at the amount of money that is actually taxable, but as an LP it is generally a tax-through situation to the unit holders (which is why you can't file your taxes until they issue their K-1, by March 1). If they don't pay it out, I'm not sure what they do.

Jeff - Editor - CoasterBuzz.com - My Blog

As I post, FUN is trading at 11.94, down roughly 10% today.

My author website: mgrantroberts.com

If they do only temporarily discontinue the distribution and then state it will be re-instated eventually they will still have a major sell-off on their hands in my opinion. In today’s crazy markets people will be running for the hills with even the slightest hint of bad news. If this becomes the case I would still invest in the company at that point if you had the money laying around for the long haul (which basically nobody does these days). Overtime FUN has proven to be profitable and I believe by 2012 at the latest we should see resurgence in the world economy. As long as Cedar Fair survives until this point which I don’t see any reason they wouldn’t things should turn out good. Now if I was at retirement age right now I would be pretty scared at what the next year or 2 may bring if I was heavily invested in this partnership.

241 Coasters and Still Counting!

You also have to consider the other alternatives:

1 - They may continue the dividend
2 - They may lower the dividend
3 - They may raise the dividend

Obviously some are more likely than others, but I don't see them entirely knocking out the cash distribution. I could see it lowered. For the price of the stock, it's a little high as is.

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Jeff's avatar

Well, I lost nearly $400 on paper today. But the fact that I have so much of it illustrates why it was attractive in the long run to begin with. I bought a relatively modest number of units when it traded in the teens about eight or nine years ago, and reinvesting the units just kept it growing and growing.

Even with a lot of the bone headed things that the company has done the last few years, I think they'd have to do some catastrophically dumb things to be in a truly bad position. If they maintain the operating margins they've got and don't get out of hand with cap ex, I don't see why they can't weather the storm of this economy.

Jeff - Editor - CoasterBuzz.com - My Blog

something catastrophically dumb like have some ungodly amount of debt on the books for a collection of assets that are worth barely 40% of the amount? Like have debt covenants that they are undoubtedly close to tripping?

face it Jeff, Kinzel is setting it up so that they will convert the company from MLPT to typical corporate structure. That will wipe out the distribution concept going forward. There is a massively bitter dude on the Yahoo finance board for FUN who laid all this out years ago. He's been spot on so far, and it doesn't bode well.

Jeff's avatar

What? I don't think they're in any danger to missing any covenants. I also doubt there's any solid reason to convert away from an LP. There are too many advantages, especially for the people (like Kinzel) who are rolling in units. His family is set for at least another generation if they keep up the distribution.

You're not really taking investment advice from Yahoo finance boards, are you? Those idiots are completely full of crap.

Jeff - Editor - CoasterBuzz.com - My Blog

head, sand, whatever. It's your money. You took great glee in pointing out a minor mistake I made in a post over a year ago regarding FUN's EBITDA/Free Cash Flow. My point has been proven out. Fun is in a world of hurt and has no way of seeing themselves out of it. You have documented Six Flags' issues with debt, but Fun is no better off.

How much debt have they retired since the Paramount acquisition? (very little). How much is coming due in 2012? (a boatload) How do you think anyone is going to refi $1.2B for fun? You had best familiarize yourself with the covenants, as in a down economy like this summer (especially for Cedar Point), they will most certainly come damn close to tripping them.

Additionally, nowDick has formally announced that they are reviewing the distribution going forward, the first time he's ever admitted the obvious. That's his only way of not tripping the covenant. What do you think the share price will be if that distribution isn't there any more? Talk about living on borrowed time.

Jeff's avatar

Before the acquisition they were at $.7 billion, after the acquisition they were at $2.1 billion, at the end of last year they were at $1.7 billion. Is 20% "very little?"

I know S&P dropped their credit rating, but did so based on the expectation that their "operating performance would deteriorate." Since the 3Q results were solid enough, and all accounts of attendance at the parks in October were exceptional, I don't see any reason for the full-year story to be a decent one. The expected mass lay-offs didn't happen in November either. Would that not calm creditors' fears?

If you have all of this insight about their credit agreements, perhaps you could show us the money instead of being abrasive. Because you say so isn't good enough for me.

Jeff - Editor - CoasterBuzz.com - My Blog

Pagoda Gift Shop's avatar

FUN is down 15% today (almost 2 bucks). It still has a little time to rebound for the day, but right now it doesn't look so good.

Pete's avatar

I don't know if things are looking so good as far as the debt. As I understand it, the debt to EBITDA covenant is 4.75 max for the fourth quarter in 2009. As of Sept. of 2008, debt to EBITDA is 4.92.

If EBITDA stays the same (might be tough to do this year), they would have to reduce debt by about 58 million to stay within the covenant. This may be difficult to do, so that is probably why they are looking to cut the distribution ahead of a possible covenant violation.

We don't know how season pass sales, group sales and hotel bookings are going for 2009, but they may well be weak. The EBITDA of last year might not be achievable this year.

I'd rather be in my boat with a drink on the rocks, than in the drink with a boat on the rocks.

Well, the stock closed down only 11.75% today, at $10.41, off its intraday low of $10.00. That price was a 52 week low, and (while I don't have the exact data at my fingertips, I'm thinking that it was 1993 when the stock was last at that price).

Pete beat me to it, but his data on the Debt to EBITDA covenant is correct, and that is exactly my point. In a terrible economy, especially in FUN's backyard (Michigan, Northern Indiana, Northern Ohio), I suspect that 2009 will suck. The economy for that part of the country is horrendous (one only need look at the number of bankruptcies/plant closings in the auto, trailer, manufactured housing, and RV manufacturing industries. Even if 2009 was consistent with 2008 (which I don't think it will be) they would be damn close to tripping that covenant. The debt documents have the covenants decreasing every year, that's the way of guaranteeing that "progress is made" (either by paying down the debt, or significantly improving EBITDA). Failure to either Reduce the Debt, or spike up the EBITDA number, causes a conflict with the Debt to EBITDA covenant.

For those that aren't familiar with loan covenants, tripping them sets off a cascade of crap that is costly, and (in some situations) could lead to the entire debt coming due. Either forbearance agreements would need to be struck (and those are only done at a pretty penny), or some other arrangement would need to be made. I doubt any lender would call the debt due right now, as they understand that there is little chance of them "getting out" whole. Either way, something has to give, and the only lever that Dick can pull, is the one related to paying down the debt with money that would normally go out to unit holders as "distribution".

What's the end scenario, the distribution goes bye-bye.

Last edited by CreditWh0re,

. . . and with it half the attraction of the stock in the first place.

My author website: mgrantroberts.com

I sold my FUN in the summer of '07 at $29.50. I wasn't happy to do it since I'd owned the stock for over 5 years, and I loved the idea that my visiting the parks was helping a company that I owned part of. But the decisions made to purchase Geauga Lake and Paramount were horrible and have left Cedar Fair saddled with debt that it cannot support. The fact that the distribution has been maintained to this point shows the ineptitude of management. They should have been paying down debt this whole time. I don't understand why anyone would keep holding this stock in hopes of picking up a few more $.48 distributions. That will not make up for the stock dropping from $36 to $10.

Jeff's avatar

Your logic makes sense if you're looking for a short-term sell, but I really don't see a long-term catastrophe. Even if CP is especially hard hit, and they weren't last year as everyone thought, that one park no longer anchors the company. Diversification was one up side of the acquisition.

I'm still not convinced there is grave danger ahead. 2002 was supposed to be terrible as well, but it wasn't.

Jeff - Editor - CoasterBuzz.com - My Blog

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